Analyst Bias: Apple vs. Amazon
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you just looked at the headlines on some of the financial web sites and blogs late last week and over the weekend you would have thought that one tech giant was in trouble and another was humming along nicely with no major issues.
You would have thought right. However, you would have mixed up the companies unless you dug deeper or read different articles.
Both companies announced business results on the same day last week. One showed greater than 24% earnings and 27% revenue gains in the quarter measured on a year-over-year basis. The other actually reported an operating loss for the first time in its history. Both reported "reduced" guidance going forward (a wash there or so you would have thought). One company has a P/E of about 15 and the other over a hundred.
I could go on and on and provide a comparison on every possible number you could think of: gross margins, operating profit, EBITA, etc. The actual numbers probably do not matter much to most analysts anymore. They have their stories to tell and axes to grind apparently. Perceptions actually rule the roost now.
In general, results from one company were mostly glossed over by the financial press and the blogosphere. The other company was mostly vilified.
Apple (NASDAQ: AAPL) announced earnings which did not meet analyst consensus estimates despite growing to $8.2 billion. The EPS "miss" was by 8 cents or less than 1%. Revenue increased by over $7 billion to $36 billion, which was a bit lower than some would have liked. The company did report that the new iPad mini would have a somewhat lower operating margin than the regular iPad. This alarmed analysts. They concluded that future earnings were bound to be lower because of this.
The company reported increased sales of iPhones, their most important product line as it is the gateway into their ecosystem and generates over half of its revenues. Total sales of the iPad tablet reached 100 million units 2 1/2 years after introduction. Apple controls about two thirds of the total tablet market right now.
Upgrades or tweaks to all of their major product lines have been announced over the last two months. To some people this means that Apple has stopped innovating and is entering an evolutionary phase. If greater than 20% growth is evolutionary I'd take that any day.
This is mostly good news you would think. Not good enough, according to many of the articles that I read. Screaming headlines about the end of the Apple bull run dominated. One stated "Why Apple is Still Not A Buy." When wasn't it a buy? Not for many years. I noted almost 6 million articles published that contained "Apple misses earnings" on an Internet search that I performed.
On the other hand, the on-line retailer Amazon.com (NASDAQ: AMZN) received much less negative press. Less than a million articles (or 16% of the Apple total) with "Amazon misses earnings" were published. This was despite the fact that the company posted an operating loss of $28 million based upon on GAAP accounting methods. Forward guidance was for somewhat lower revenue growth for the remainder of the year.
Most analysts, if they commented at all, seemed to shrug off the news. One stated that the reduced performance was the result of the necessary actions that Amazon needed to take in order to grow their business, especially internationally where revenues are approaching half of the overall total. One of them theorized that it's all part of "necessary leverage and a reversal in key expense trends" as he reiterated his "overweight" rating on the stock. What does that really mean?
Not too much has been mentioned about the fact that Amazon, perhaps for the first time in its existence, may have some real competition coming up in some segments of its ecommerce business. A large discount retailer recently announced expansion of a test program offering same-day delivery of about different 5,000 items for a flat fee of $10. This action could cut into Amazon performance going forward. Amazon does offer the same service for about the same price. However, the above information does not get widely reported or discussed by the financial media or is glossed over as an afterthought.
Don't get me wrong here. I have nothing against Amazon. I think it's a solid company that has provided fantastic returns to its investors and great service to its customers for many years and probably will do so in the future.
Also note that I am a big fan of Apple. I think it has been one of the most innovative tech companies in history that actually created a complete market of products and services that the world loves. It has achieved near cult-like status. Do you see customers lining up for days outside stores for products of any other company? Not too many.
All I ask from analysts, the financial media and my fellow bloggers is a level playing field. Don't write inflammatory headlines or articles based upon fleeting perceptions about the companies involved and ignore the underlying strength and weaknesses. Don't look at short-term trends like "this marks the third miss Apple has had in the last five quarters." Missing earnings by less than 1% or reduced guidance on operating margins for one product by a few points does not indicate the end of the world. A one or two year period is not a sufficiently long enough time to make any estimates about the future (or even the past) of a company.
It would have been better for the headlines to read something like "Apple and Amazon results indicate that we should pay a little closer attention in the future" instead of "this Apple disappoints" or "Amazon is poised to grow".
A famous economist and Fed chairman once said "how do we know when irrational exuberance has unduly escalated asset values?" I'd say "how do we know when irrational pessimism has unduly decreased asset values?"
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